Commissioner of Income Tax vs Caryaire Equipments India Pvt. Ltd.

This matter is taken up today since 14.04.2015 was declared a holiday.

The revenue is in appeal against various orders of the Income Tax Appellate Tribunal (ITAT) in respect of the assessee whose claim for deduction under Section 80-IA of the Income Tax Act, 1961 (hereafter "the Act") was confirmed by the CIT(A). The ITAT rejected the revenue''s appeal. The main order in the present batch of appeals is in respect of AY 2001-02 by the ITAT in ITA 3016/Del/2008.

The assessee was incorporated on 11.10.1989 and commenced production from 1990 in India. This manufacturing unit is known as Unit-I. It consequently established another factory in Sector-59, Noida (Unit-II) that started commercial production in September 1997. Both units used to engage in manufacture and fabrication of steel and other metal accessories, easy air distribution products, air control and treatment devices etc. Both units claimed and were granted benefit of deduction under Section 80-IA of the Act. The second unit was given this benefit from 1998-99 onwards. The manufacturing license dated 17.05.1999 of the first unit was surrendered after cessation of Section 80-I benefit. Thereafter, Unit-I used to perform job work in respect of orders procured by Unit-II. When the assessee claimed benefit of Section 80-IA for AY 2001-02, the Assessing Officer (AO) denied the claim on the ground that this amount to subterfuge as the machinery and other equipment of Unit-I was being used for manufacturing activities of Unit-II. The CIT(A) went though the record and by order dated 16.05.2007 after noticing the decision in Textile Machinery Corporation Limited, Calcutta Vs. The Commissioner of Income Tax, West Bengal, AIR 1977 SC 1134 : (1977) 107 ITR 195 : (1977) 2 SCC 368 : (1977) SCC 282 : (1977) 2 SCR 762 directed as follows:

"Thus in the instant case what was envisaged by the AO was to appropriate the profits, IF ANY, relating to the labour charges carried out by Unit-I and should have been taxed such profits of Unit-I independently as against denying the deduction u/s 80IA altogether. Thus considering the fact of case and various applicable judicial pronouncements, I am of the considered view that appellant company was entitled to deduction u/s 80IA in respect of Unit-II and therefore, AO is directed to allow the deduction u/s 80IA in respect of Unit-II, subject however, while computing the profits of Unit-II, the AO should take into consideration to reduce the appropriate profits, if any, relatable to activities carried out by Unit-I and compute the deduction accordingly."

By the impugned order, ITAT affirmed the findings of the order of CIT(A). The ITAT was of the opinion that given the nature of the order of the CIT(A) who had remitted the matter to the AO for computation purposes to allow such benefit of Section 80IA, having regard to the activities in Unit-II, the benefit of the provision could not have been excluded altogether. The ITAT also recorded the finding that the assessee could not be accused of creating a tax evasion device.

We have considered the submissions of the revenue. The revenue urges that the ITAT''s answer was unsustainable because the assessee in effect stopped its manufacturing activities in Unit-II and relied inter alia on the job work outsourced to Unit-I. Having availed the benefit of Section 80-IA to the fullest for Unit-I, the assessee could not have claimed once again through the subterfuge adopted by it.

This Court has considered the submissions. The following question of law was framed on 19.04.2012:

"Whether the Income Tax Appellate Tribunal was right in holding that the second unit of the respondent-assessee located at A-10, Sector 59, Noida was not formed by splitting up, or reconstruction, of a business already in existence?"

The order of the CIT(A) in the present case took note of the fact that the AO denied altogether the benefit of Section 80-IA on the terms that there was no manufacturing activity at all in Unit-II. The AO apparently completely ignored the fact that Section 80-IA benefit was enjoyed by the assessee for 1998-99 and 1999-2000. In this view, the CIT(A) - we think - quite correctly too - directed the AO to compute the portion of the benefits arising out of the manufacturing activities carried out in Unit-II and execute the component of job work in the process and the income attributable to the job work performed by Unit-I. The assessee was not aggrieved by this. In the circumstances, we are of the opinion that the question of law framed has to be answered against the revenue and in favour of the assessee. The appeals are accordingly dismissed.